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Financial conditions in the region as a whole posted an improvement in the month

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The Itaú Unibanco LatAm Market Conditions Index measures the overall market conditions of Latin American countries (Brazil, Mexico, Colombia, Chile, Peru). In building the index, we replicated the methodology (see end of report) used for Brazil for the other Latin American countries, and applied weights based on the size of each country's economy, as measured by GDP.

Financial conditions in the region as a whole posted an improvement in the month, reaching 0.44 (from 0.28 in March), despite the sharp decline posted in Chile. However, the three-month moving average declined to 0.53 (from 0.62 in the previous month). Financial conditions in Peru (benefiting from an improvement in copper prices) and Colombia (due to an increase in the stock exchange) contributed to the improvement in the month. The negative highlight was Chile (influenced by the copper prices dynamics and exchange rate depreciation). In Mexico and in Brazil, the conditions remained virtually flat, with the improvement in the commodities components offsetting the slight deterioration in the financial conditions.

Itaú Unibanco Market Conditions Index (IU-MCI)[1] for Brazil remained broadly stable at 0,17 in April, compared to 0,15 in the end of March. The interest market and the 5-year CDS also contributed negatively in the month, while the improvement of commodity related to energy and minerals have offsetted the financial components’s negative impact.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent declined to 0.29 (from 0.86 in the previous month). The three-month moving average also posted a decline, to 0.88, compared to 0.99 in March.

In order to analyze the factors behind the recent behavior in the Brazilian market, we have regressed the Brazilian financial variables subcomponent onto a market environment index built from peer countries[2]’ data (Table 1 in the Appendix). The chart below shows the decrease in the still positive contribution of the idiosyncratic factors related to Brazil, while the factors related to peers continue to contribute negatively to the financial conditions as a whole.

The commodity prices subcomponent ended February at 0.09, up from -0.23 in the previous month. However, the three-month moving average posted a slight decline to 0.40, from 0.47 in March.

[1]The IU-MCI measures the market conditions in Brazil and is also a good leading indicator of the country's economic growth, according to econometric exercises. The index consists of two sub-components: the first one is composed of Brazilian financial variables - interest rates, exchange rates, country risk measures - and the second is composed of commodity prices. A result above zero means that market conditions are expansionary, and below zero, contractionary.